Policymakers in the US, Eurozone, UK, and Switzerland all warned in December that it was too early to declare victory in the effort to curb inflation. (UBS)

Global stocks lost 3.9% in December, cutting the total return for the fourth quarter to 9.8%. The risk-off move was led by the US, with the S&P 500 delivering a negative total return of 5.8%—reducing the gain for the quarter to 7.6%. While optimism has continued to mount that price pressures are easing, policymakers in the US, Eurozone, UK, and Switzerland all warned in December that it was too early to declare victory in the effort to curb inflation. Notably, top officials at the Federal Reserve scaled up their forecasts for where they see rates peaking. The biggest shift in rate expectations, however, was in the Eurozone, leading to a roughly 60-basis-point increase in the yield on the 2-year German bund.

The main exception to the risk-off shift in markets was in China, where the government moved swiftly to unwind pandemic restrictions. MSCI China returned 4.8% in December, the only major market to gain ground over the month. That boosted the fourth quarter return to 12.5%.


Global equities lost ground in December, as worries over the pace of central bank tightening resurfaced. All major markets except China moved lower. The largest decline was in the S&P 500, with a total return of minus 5.8%. Japan was also among the biggest losers for the month after the Bank of Japan surprised markets by saying it would tolerate a higher yield on 10-year government bonds. The MSCI Japan lost 5.2%. More defensive markets fared better, with the MSCI UK giving a negative total return of 1.4%. The Swiss market lost 3.6%. China was a bright spot. The market was boosted by a swift move toward reducing COVID-19 restrictions. With a full reopening now in sight in the first quarter of the 2023, MSCI China rallied 4.8%, taking its gain for the fourth quarter to 12.5%. However, the MSCI EMU was the best performing index for the quarter, with a total return of 12.7%, as the Eurozone proved more resilient than expected in the face of declining supplies of Russian energy.

December marked a weak end to what was otherwise a strong fourth quarter for equities. Markets continue to be driven primarily by the shifting outlook for inflation and central bank policy. The fourth quarter rally was largely the result of mounting confidence that the worst of the inflation surge has passed for the major economies. However, in December it became clear that top central banks are not yet ready to declare victory, and tightening looks likely to go further than markets had been expecting. This supported our view that many investors had moved too far and too fast in pricing in a dovish pivot in central bank policy. While investors can start preparing for the positive turn in markets that we expect in 2023, we still favor tilting exposure toward defensives and fixed income markets at the start of the year.

Fixed income

Trading in the US bond market was less volatile than equities in December, with the yield on the 2-year US Treasury rising only 3 basis points over the month to 4.35%. The yield on the 10-year US Treasury rose around 10 basis points to 3.76%. Overall, the return on the Bloomberg US Treasury index was a negative 0.5%. But there was a bigger shift in European fixed income markets over the month following a more hawkish statement from ECB President Christine Lagarde than markets had been expecting. The Bloomberg Pan-European Aggregate index delivered a negative return of 2.9% while the Bloomberg Euro Aggregate Corp. index lost 1.8%. US and Euro high yield both produced negative total returns. Still, even after this weak end of the year, fixed income reflected a risk-on shift for the fourth quarter overall with US and Euro high yield gaining 4% and 4.7% respectively.

After the worst year on record for global fixed income, there's a growing case to be made that 2023 will be the year of bonds. While rates volatility is likely to persist in the near term—given the wide range of potential policy paths—we think the return outlook for high-quality fixed income looks appealing over the coming year. We think the attractive level of outright yields on high grade and investment grade bonds should generate the bulk of returns going forward, while the breakeven yield provides a sufficient cushion to potential market-to-market losses, creating an asymmetric return profile. When credit fundamentals deteriorate in a recession, bonds with higher credit risk tend to underperform as investors price in the potential for negative rating actions and defaults, and demand more compensation for credit and liquidity risks. Meanwhile, high-quality bond prices tend to be supported by falling government bond yields during periods of recession, which usually outweighs the impact of rising credit spreads.


In December, the UBS Constant Maturity Commodity Index (CMCI) delivered total returns of around 0.3%, bringing the 4Q22 performance to 8.4% and the 2022 performance to 17%. Commodities have been the best-performing asset class for two years in a row now. Sector wise, energy lost the most ground in December, down by 3.4% suffering primarily from a drop in US natural gas prices due to milder temperatures. In contrast, a weaker US dollar made precious metals the best performing sector, up by 5.3%. The other three sectors—industrial metals, agriculture and livestock—were up by 1.5-3.2% in December. During 4Q, all the sectors contributed positively to performance. In 2022, the energy sector was the clear standout, surging 36-38% in 2022. Agriculture finished second with less than half of that performance. Base metals, on the other hand, delivered negative returns as China's economy faltered. Due to the war in Ukraine and higher US interest rates, precious metal prices swung over the year but finished largely flat.

We see another strong year for commodities in 2023, and forecast high-teen percentage total returns on an asset class level. We expect energy to take the top spot again, followed by industrial and precious metals respectively. Precious metals such as gold look attractive from a portfolio insurance perspective, while agriculture and livestock should deliver flat to positive returns on a full-year basis. Our positive view for 2023 is based on a robust economic recovery in China, the start of a Fed rate-cutting cycle later in the year, and several unresolved supply-side issues that should keep market balances tight.

Main contributors: Christopher Swann, Alison Parums, Linda Mazziotta

Read the original report, including asset class performance figures and the market-by-market macroeconomic developments driving sentiment in the US, China, Eurozone, UK and Japan. December 2022: Month and quarter in review

This content is a product of the UBS Chief Investment Office (CIO).